Opinion: A new platform lets you buy stocks of blue-chip paintings, but is art a wise investment?


In the fall of 2018, a work by Banksy, “Love is in the Bin”, sold for $1.4 million.

Now the original buyer has put the work up for sale and it is expected to make over $5 million— this would represent a return of more than 250% on the initial investment.

What if, instead of the art market being the preserve of the wealthy, ordinary people could buy shares of an expensive work of art and resell the shares as they please?

This is exactly what a new platform, masterpiecesseeks to do.

Economic theory suggests that, by definition, investing in art might offer lower returns than investing in stocks. That’s because part of the return on investment in art should be the intrinsic enjoyment of the objects themselves.

Art investment funds have been around for more than a century. Masterworks, however, has put a new spin on an old practice, in that the platform allows individuals to buy shares of specific artworks in $20 increments. Investors can then sell those shares on an easy-to-use secondary market or wait for Masterworks to sell the coin and receive the prorated proceeds.

For almost 10 years I have been teaching a course in economics and art with the art historian Nancy Scott. In this course, we spend time discussing the history and profitability of investing in art, both in theory and in practice.

For those considering buying art purely for investment purposes, it is important to understand how art investment funds have traditionally operated and whether experts believe it is a a good investment.

The French pool their resources

An ancient art investment fund was called bear skin (La Peau de l’Ours), which was based in France at the beginning of the 20th century.

The name comes from a french fable which contains the aphorism “never sell the bear skin until you have actually killed it” – the French equivalent of “don’t count your chickens before they hatch” – and it alludes to the fact that investing in art can be risky business.

Partly intended to support emerging Post-Impressionist artists, such as Picasso, Matisse and Gauguin, the fund was run like a syndicate in which a small number of partners each contributed equal amounts to buy a collection of paintings.

Businessman, art critic and collector Andre Level manages the fund and organizes the sale of paintings. After the sale of the paintings, he received 20% of the sale price For his work. The artists received 20% of the fund’s profits in addition to the money they received from the initial sale. Investors would then receive the remainder in equal proportions.

This concept of returning part of the sale price to the artist is known as resale right, or resale right of the artist. Versions of this are now the law in most parts of the western world other than the United States.

This first art fund was a success. It created a demand for new works of art and supported innovative impressionist and modern artists, while providing a significant return to its original investors.

Not all funds are equal

Another famous investment in art was made by the British Railways Pension Fund.

This fund was created in 1974 to manage a small part of the retirement funds of the company’s employees, and the objective was to buy works of art for 25 years before reselling them. The fund won 11.3% compounded returns per year, but due to high inflation for much of this periodthe actual gains were much lower.

Other Notable Art Funds Ended in Failure. The Banque Nationale de Paris art fund sold its investment in 1999 at a loss and a fund managed by British art dealer Taylor Jardine Ltd. did the same in 2003. The UK Department of Commerce closed the Barrington Fleming Art Fund in 2001. after determining that it was created under fraudulent circumstances. And Fernwood Art Investments, founded by former Merrill Lynch executive Bruce Taub, failed to even get started after Taub. was found guilty of embezzlement funds from its investors in 2006.

Nevertheless, there are art funds that are still in operation, such as Anthea and The fine arts groupand, of course, banks and auction houses have long described investing in art as a diversification strategy adapted to the wealthiest.

But what do economists say about art as an investment?

Is it really a “floating shit game”?

Economic theory suggests that, by definition, investing in art might offer lower returns than investing in stocks. This is because it is considered a passion investment. Like investing in sports memorabilia, jewelry, or coins, part of the return on investment in art should be the intrinsic enjoyment of the objects themselves. The total return consists of the monetary return and the enjoyment of the property.

Since stocks do not, for most people, provide this pleasure value, the monetary returns from an investment in these financial instruments should, in theory, be greater than the monetary returns from an investment in art.

But it is important to really analyze the numbers.

One of the very first articles on the monetary return of investing in art was published in 1986 and written by the late eminent economist William Baumol.

The title? “Unnatural Investing: Or Art as Floating Shit Game.”

Baumol estimated that the long-term inflation-adjusted returns of investing in art, over a 300-year period, were just 0.6%. Some researchers have since estimated higher yields. For example, the work of the Yale finance professor Will Goetzmann and economists Jiangping Mei and Mike Moses found inflation-adjusted returns of 2% over 250 years and 4.9% over 125 years, respectively. Estimated returns vary by time period, sample, and methodology.

Also, these studies do not include transaction costs, which when it comes to art can be significant, thanks to the high commissions charged by auction houses or private dealers to serve as intermediaries. They also do not take sample selection into account; paintings that fall in value often cannot be sold at auction.

The Goetzmann and Mei and Moses studies, however, estimate that the performance of the SPX stock market,


does not seem to be correlated with returns on investment in art. So there may be benefits to investing in art as a way to diversify your portfolio.

Art for all?

Masterpieces, however, are a bit different from the traditional art backgrounds discussed above. Investors buy shares of a single work of art, rather than investing in a fund that includes multiple works. The entry price is much lower, and as long as there are willing buyers for the artwork share, investors are not locked into the fund for any given period. Investors can earn a return simply by selling stocks that rise in value, without waiting for the artwork itself to sell.

But like traditional art funds, investors in art stocks sold by Masterworks will make money if the price of their artwork goes up and lose money if it goes down.

Ultimately, Masterworks looks innovative and fun. The format will likely appeal to a younger generation of investors, many of whom may have started investing small amounts through apps such as Robinhood.

The site is easy to navigate and might provide some enjoyment – even I was tempted to try buying stocks.

But should we hope to become rich by investing in art? Probably not.

Also, unlike Skin of the Bear, it doesn’t necessarily benefit emerging artists. Masterworks focuses on established works with a track record, by artists such as Banksy, Andy Warhol and Claude Monet, to name a few.

That being said, Masterworks could bring the investment in art to a mass audience. But beware, art is a risky investment.

Kathryn Graddy is Dean of the Brandeis International Business School and Fred and Rita Richman Emeritus Professor of Economics at Brandeis University.

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